According to a presidential decree published today in the official gazette, Turkey has cut the tax on foreign exchange and gold purchases from 1% to 0.2%. The tax rate had previously been increased to 1% in May 2020 in order to help curb the purchases of foreign exchange and gold and support the Turkish lira at the height of the coronavirus pandemic. Having failed to hold up the Turkish lira, the Turkish government has decided to reduce the F/X and gold purchase tax, under the pretence of “normalisation” of monetary policy in light of the pandemic.
In the same decree, the government also cut the withholding tax on new or renewed Turkish lira deposit savings accounts until the end of the year in order to encourage savings in the local currency. The withholding tax rates changed as follows: on up to one month, three month and six month maturity deposits from 15% to 5%, on up to one year deposits from 12% to 3%, and on deposits of one year or more from 10% to zero.
Market analysts see the above moves as acceptance by the Turkish government of its failure to control the Turkish lira via unorthodox measures and restrictions. Last week’s hike by the Turkish Central Bank of its one-week repo rate by 200 basis points to 10.25%, the Turkish banks’ regulator BDDK’s increase in F/X transaction swap limits, and BDDK’s reduction in its asset-ratio formula for banks were also seen as indications of the government’s decision to roll back its restrictive measures and pursue a looser monetary policy.
Though traders welcome the new moves by the government, they are still far from believing that they can trust the government to adopt a sound and reliable monetary policy over a longer time span. The foreign currency holdings of local residents stand at USD 218.1 billion, near a record high, and as the government’s need for foreign currency becomes keener, there is a higher chance of its introducing capital controls.